David Maude is an independent consultant and

							Cover Story                                                                                            The affluent market



             I Interview with David Maude                                   Expert in wealth and asset management



             “The long-term outlook
             is very positive”
             Over the last eight years, the highest growth in wealth has been in Asia, Europe and North
             America. Most recently, wealth in the Middle East, Africa and Latin America has grown very
             strongly. What are the key wealth market opportunities and how are players going about
             capturing them? We asked David Maude, an industry expert.




                     avid Maude is an independent consultant and            “Superstars” (including entertainers, sports stars,


             D       training professional, specialising in wealth and
                     asset management. He is the author of the
                     recent book, Global Private Banking and
             Wealth Management, published by Wiley.
                                                                            financial sponsors and investment bankers) also
                                                                            represent a key source of new wealth, driven by skill-
                                                                            biased technical change.

                                                                            An emphasis on products has been replacing the
                                                                            traditional emphasis on service. Has that now
             What do you call a wealthy client? Could you draw              changed?
             the profile of an average one?                                 Service has always been the hallmark of the wealth
             If you had asked that question a few years ago, the            industry. But there have been important shifts in what
             answer would have been pretty straightforward: a               constitutes good service. Happily, most banks have
             wealthy client is someone with investable assets greater       moved on from dog walking and jewellery finding. For
             than 1 million dollars. These days, the situation is more      most clients, proactive, objective, trusted and high-
             complex.                                                       quality financial advice is now the dominant service
             There are no hard and fast rules. Individual institutions      requirement. Financial products have, to some extent,
             differ widely both in the level of the wealth threshold they   become commoditised, particularly given the shift
             use to separate a wealthy client from a mass-market            towards open architecture. Identifying and gaining
             customer, and in how they define wealth itself (e.g.,          appropriate access to the best third-party products has
             income, investable assets, net worth).                         become an important value-added service (and is a
             In most developed markets, an entry-level wealthy client,      strong source of competitive differentiation).
             often known as “mass affluent”, would typically have
             investable assets of over 100,000 dollars. A private           What are the key trends in terms of investments?
             banking client would typically have more than 5 million        The obvious major trend here is the rapid growth: 1) of
             dollars. It’s reasonably safe to say that the average          commoditised investment products, such as exchange
             wealthy client has investable assets of around 4 million       traded funds, which aim to deliver returns in line with
             dollars and is over 60 years old. Beyond that, drawing         market indices; 2) of alternative investments (including
             a meaningful single profile of the average wealthy client      hedge funds, private equity, structured products and
             is tough and probably not all that useful.                     commodities) which aim to deliver absolute returns in
                                                                            excess of conventional market indices.
             Where does the wealth come from, in both cases?                Allocations to alternatives have, in fact, doubled over
             Traditionally, the key sources included inherited family       the last five years, and are now typically around 20% for
             wealth, and wealth generated by professionals                  many wealthy clients. Conventional active single-
             such as doctors and lawyers, and by senior                     manager funds are being squeezed. Clients are seeking
             corporate executives.                                          greater diversification across geographies, products,
             Today, there is far greater diversity. One well-known trend    investment styles and managers. Open architecture is
             is the shift from “old” to “new” wealth. Much of the           now a reality, though not yet fully embraced by all
             newly created wealth is sourced from business owners,          players. Another key trend is the shift from offshore to
             including the dotcoms, biotech, media and real estate.         onshore. That has been driven by various international


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The affluent market                                                                                   Cover Story




                                                              Is there a place for new players?
                                                              Absolutely. Over the last decade, new entrants such as
                                                              EFG International and Banque Syz have had dramatic
                                                              success. Clients are open to fresh approaches, where
                                                              there is demonstrable appeal.
                                                              But truly radical approaches have been sadly lacking.
                                                              For example, despite many clients explicit desire for
                                                              greater transparency and value for money, a Ryan Air of
                                                              the wealth management industry has yet to emerge. In
                                                              addition, it is puzzling as to why there has not yet been
                                                              a high-profile tie-up between a wealth manager and one
                                                              of the luxury brands, particularly in Asia. This, I believe,
David Maude: “Traditionally, the US and Europe stood at two   is another key area to watch.
extremes: stock brokers dominated in the US; private banks
dominated in Europe.”                                         What part does the Internet play?
                                                              The Internet’s key roles include transaction execution (in
tax initiatives and by the emergence of attractive onshore    particular brokerage and payments), online reporting,
investment opportunities in traditional offshore              aggregation and analytics. But overall, the Internet’s
strongholds such as the Middle East and Latin America.        impact has mostly been very limited. In the late 1990s,
But offshore banking is not on its death bed. The pace        there were a number of experiments with online advice,
of product innovation has also picked up. Areas to watch      and some high-profile ventures targeted mainly at self-
include 130/30 funds, which combine long exposure of          directed mass-affluent clients. These, pretty much
130% of the assets with 30% short, (“short extension”),       without exception, were a costly flop.
Shariah investments, productive philanthropy, and
socially responsible investments.                             What common factors in the emerging markets do
                                                              you see, in terms of target clients (mass-affluents,
Globally, there are now a range of different private          HNWIs?)?
banking players. Is a winning model emerging?                 With emerging markets, it is difficult to generalise. Key
Traditionally, the US and Europe stood at two extremes:       wealth drivers include economic development and
stock brokers dominated in the US; private banks              liberalisation, and oil and commodity-driven growth. In
dominated in Europe. But there has been convergence           terms of client segments, HNWIs are the primary target
in recent years, with brokers adding advisory and banking     but, in many markets, there is also a growing pool of
capabilities, and private banks broadening their              mass-affluent clients. Overall, key product demands are
investment product ranges. Today, brokers and private         not all that different from those in mature markets.
banks of various types have been joined by other types        Clients in many emerging markets continue to value
of players, including universal banks, trust banks,           offshore solutions largely as protection from domestic
investment banks, independent advisory boutiques,             instability. Particularly in Asia, clients tend to have
family offices, asset managers and product specialists.       relatively high risk appetites, often demand portfolio
One recent trend is for private banking specialists and       leverage, and generally take a more active approach
the investment banks, on average, to gain share at the        to investment.
expense of some of the universal banks, which had
performed relatively well during the 2001-2003                Which strategies have players been using to gain
downturn and its immediate aftermath. This reflects           market share?
greater client sophistication and changes in the              Most players have been busy hiring private bankers. The
investment product landscape, factors that are largely        main focus here is on experienced individuals and/or
structural which suggests that this trend may be here         teams, which bring existing client relationships. The cost
to stay.                                                      of experienced hires has risen very sharply, so some >>>


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Dossier                                                                    The affluent market




       >>> players are investing in lateral hires from industries such
             as investment banking, accountancy and even the
             armed forces. Other initiatives include acquisitions of
             wealth units or entire firms, and joint ventures. But these
             approaches can be expensive and are notoriously tricky
             to execute well.
             Some players have been opening offices outside capital
             cities in order to acquire new local business clients, a
             good example being Barclays, Coutts and HSBC in the
             United Kingdom. Other players have been focusing on
             pure organic-oriented initiatives, for example, by
             developing new propositions and by revamping their
             client coverage models.

             How do you imagine the future of private banking
             and wealth management? Will it keep on growing?
             The long-term outlook for the industry is very positive.
             That said, in the short term, a temporary cyclical setback
             at some point cannot be ruled out, particularly given the
             volatility in financial markets.
             So there is more wealth in wealth management. Yet, just
             as client wealth itself is unevenly held, the “wealth” of
             wealth managers will be subject to growing inequality
             across geographies and business models. Well-run large
             players will operate alongside smaller niche specialists.
             But mid-sized generalists in mature markets, beware. I




52 | Efma(g) May / June 2007 - N°207